Oil & Natural Gas Corpn Ltd. (ONGC) - Chairman Speech

Company chairman speech

Dear Shareholder

If I were to sum up the last one year in the global oil and gas business 'interesting'will be an understatement despite the largely familiar nature of events and the manner inwhich they unfolded in the then prevailing scenario over the course of time changing andredefining to a large extent not just some of our firmly-held beliefs on markets butalso challenging many established players to vastly alter their strategies for the future.Oil prices tumbled not without precedent but certainly beyond anticipation and themarket reality we inhabit presently is anything but similar to the one we were in a littlemore than a year ago.

It is in this context of surrounding volatility that I on behalf of the Board ofDirectors of Oil & Natural Gas Corporation Ltd the country's most valued PublicSector enterprise and over 33000 committed ONGCians present to you ONGC's Annual Reportfor the financial year 2014-15; highlighting the Company's performance in operational andfinancial metrics through the period. Globally it has been an uneasy and turbulent yearfor many in the industry and our performance as the country's flagship energy explorerassumes even more significance in times like these in view of our enduring commitment tothe aspirations of this country and the trust placed in us through the years by our manyshareholders. I believe value resides in the ways a company chooses to grow it ismanifested through the consistency and reliability with which a company delivers on itsmyriad commitments - financial social or environmental. In FY'2014-15 we put a check onall of those fronts. Notwithstanding the increasingly challenging business environment itmarked another year of solid performance from ONGC and reaffirmed the Company's provencapabilities in sustainable value creation. Beyond impressive operational and financialnumbers what must hearten ONGC's many shareholders further is that the resilience of ourbusiness is also underpinned by a strong focus on Safety and an environmentally-awareapproach making our model not only robust but equally adaptable to the emergent needs inthis evolving landscape.

Coming to specifics of our performance at ONGC a strong exploratory performance hasalways featured high among the company's priorities.

e remain steadfast in our commitment to organic growth through steady and continuousenhancement of our already substantial reserve position. FY'2014-15 was a strong step inthat direction. We made 22 oil and gas discoveries in the last financial year. On 2Pbasis we made cumulative reserve accretion of 61.05 Million Metric Tonnes of OilEquivalent (MMtoe). With a Reserve Replacement Ratio (RRR) for the year at 1.38 we havealso ensured a stronger pipeline of future hydrocarbon supplies.

However the biggest positive most undoubtedly from last year comes from the arena ofproduction as we reversed the trend of declining indigenous crude oil output. Ourstandalone domestic crude output was 22.26 MMT compared to 22.25 in the previous fiscal(FY'14). The increase is marginal yet it shows the rich possibilities of a focusedoperational approach and effective deployment of technology in a portfolio that ispredominantly mature. The results of our technology-intensive schemes geared to improveONGC's recovery rates are the most outstanding in the prolific Mumbai Offshore fieldsthe mainstay of ONGC's domestic portfolio where production shot up by 4.3 percent on ayear-on-year basis. In fact supplies unlocked through these schemes accounted for over 34percent of our domestic supplies in FY'14-15. There is potential for more and promisingprojects like Mumbai High North Phase-III and Mumbai High South Phase-III form part of ourplans to realize additional volumes from our legacy assets. However our gas output forthe year dipped as a result of which total standalone domestic supplies of crude oil andgas from ONGC-operated fields declined to 44.28 MMtoe from 45.53 MMtoe a year ago.

Beyond our commitment to maximizing output from the producing assets we are alsoactively focused on monetizing fresh reserves through several meaningful developmentprojects which upon execution has the potential to add meaningful material volumes to ourcurrent production profile. Six major field development projects worth over Rs 24000Crore were approved by the Board of ONGC during the past one year of which thedevelopment of Daman and Nagyalanka are the more significant ones. Marginal fieldsotherwise deemed commercially unviable for their pocket-sized reserves and issues withaccessibility have been developed through a clustered approach and they combined tocontribute a healthy 13.8 percent of the company's standalone domestic crude oil output.

Overall ONGC remained the largest producer of oil and natural gas within the countrycontributing over 69 percent and 70 percent to country's production of oil and gasrespectively. The total output of ONGC group (including ONGC Videsh and ONGC's share inPSC-JVs) stood at 58.34 MMtoe (59.2 MMtoe in FY'14).

Financially as well FY'2014-15 was an encouraging year for ONGC considering thewidespread pessimism around the earnings outlook in the sector due to the depressed oilprices. The oil price slump did dent our earnings but we still managed to register annualrevenue of Rs 830935 million. Our combined group revenue for the fiscal was Rs 1660668million. Standalone Profit-After-Tax was Rs 177330 million (down 19.7 percent) while theGroup PAT was Rs 183335 million (down 30.8 percent).Staying on the earnings front werealized a higher value for our produced barrel ($44.87/bbl) of crude compared to theprevious year ($40.97/bbl) largely on account of our lower contribution towards sharing ofunder-recoveries of OMCs which at Rs 362996 million was significantly lower than oursubsidy burden of FY'14 (Rs 563842 million). The Government's progressive stance on keypolicy matters related to the oil and gas sector has played a key part in this regard.ONGC has consistently been among the top dividend payers in the country and FY'15 was nodifferent. What's more significant is that even in a year where businesses were severelyimpacted by diminished cashflows ONGC's overall dividend payout ratio (with dividend tax)was higher (55 percent) than that in the preceding fiscal (43 percent). Total dividendpay-out to shareholders was Rs 81277 million. This amply illustrates the strength andflexibility of ONGC's balance sheet; it also contrasts ONGC's enduring conviction in thestrength of its highly valued long-term relationship with its shareholders with theshort-term cyclicality of the markets.

Our international E&P operations too is on a stronger footing relative to lastyear. ONGC Videsh over the last few years has aggressively expanded the scope andpresence of our operations on the global map with a view to creating a more balanced anddiversified portfolio a necessary hedge against the characteristic volatility of ourfunctional environment. We grew our exploration position during the year having securedblocks in Myanmar Bangladesh and New Zealand which crucially marks our first entry intothe Asia-Pacific region. Also our production in spite of our interrupted supplies inSouth Sudan and Syria registered an uptick as we pumped output to 8.87 MMtoe in FY'15from 8.36 MMtoe in FY'14. This marks the second consecutive year of growth for ouroverseas business in terms of production performance. Today ONGC Videsh is present in 17countries across 36 projects of which 13 are producing properties. Success of our foraysin the international arena is central to realizing ONGC's long-term growth plans.Management accordingly has invested significant resources towards further expansion ofour global business in a manner that new properties not only play to our growing strengthsbut also bring in desired level of exposure to new plays and technologies. A stronger ONGCVidesh eventually will greatly augment the country's energy security.

All the while we remain committed to our vision of evolving into an integrated energymajor of international repute. In that respect progress and performance of our domesticvalue-chain integration ventures have provided us with much-needed assurance regarding ourexposure in that business domain. It was a major year for our downstream subsidiary MRPL.All units under the 15 MMTPA refinery's Phase-II expansion plan have been commissioned.Having achieved its highest ever throughput of 14.65 MMT in FY'15 the management buoyedby an improved market outlook and a facilitating policy regime is actively consideringthe expansion of its retail footprint. ONGC Tripura Power Company Ltd (OTPC) our venturein the Power segment is a fine example of ONGC's successful diversification intonon-E&P business as well as its promotion of energy within the framework ofsustainability. The 726.6 MW combined cycle power plant is not only the biggest energyproject in the country's North-eastern region in terms of investment it is also one oflargest UNFCCC-registered CDM projects in the world earning an estimated annual CER of 1.6million. Our strong endorsement of a sustainable approach to doing business in the energyindustry stems from our understanding that businesses exist to create value that ismeaningful and relevant across the broad spectrum of its community of stakeholders. Energyis essential to motoring not just the global economic engine but equally important for theimprovement of the human condition. Right now there are countless global citizens andfellow countrymen who are bereft of the bare minimum necessities of life. And every formof energy be it fossil fuels renewables or alternative has its own unique role to playin alleviating this reality. It is not merely about the kind of fuels we use but also somuch more about how we find produce and consume those fuels that is largely going todetermine how sustainability influences overall business decisions. At ONGC we arecontinuously trying to improve our performance on this parameter by reducing the energyintensity of our operations and by bringing in an element of reusability in our resourceconsumption patterns. This along with our Corporate Social Responsibility (CSR)initiatives designed to positively integrate our business with communities and the socialenvironment around our operational areas lend a healthy dimension to the ONGC model.

ONGC's sustained performance and contribution in the energy arena continue to beacknowledged in the industry. We are rated highly among our corporate peers in suchrespected listings such as Platts 250 Global Energy Rankings Forbes Global 2000 andFortune's orld's Most Admired Companies.

I firmly believe that strong relationships at every level remain at the core of acompany's success in the long run. From that perspective our relationship with theGovernment particularly the Ministry of Petroleum & Natural Gas our most significantstakeholder has been marked with great understanding and fulfilment. It is a partnershipspurred by the urgency to achieve the common goal of greater energy independence for thecountry and the support and consideration extended by it to the organization through allthe many eventful years of ONGC's existence has been nothing less than outstanding.Stability in the energy industry is a chimera an overused concept that seldom encountersreal-world translation. But you are looking at a company that can look ahead to the futurewith as much confidence as it can look back upon its more than 50 years of rich legacyand with the potential to deliver even more value for the investment you have committed itthrough the years. ONGC continues to be a worthy exemplar of consistency in a world wherechange is the most abiding norm. In the same vein you have remained steady with yoursupport for this company. e sincerely acknowledge the confidence and trust you have placedin us right along the journey equally through periods of growth and turmoil. You ourvalued shareholder are the cornerstone of our motivation for greater success.